“ The law requires a reserve study, including a visual inspection, every 3 years and financial updates annually”
Top Three Reserve Study Questions to Ask Yourself by Damian Esparza
Why do we need a Reserve Study?
In the state of California the law requires a reserve study, including a visual inspection, every 3 years and financial updates annually to prepare the Assessment and Reserve Funding Disclosure. Otherwise known as the“ reserve disclosure,” this document provides a snapshot of the homeowner association’ s( HOA) financial condition, and it answers the looming question,“ Will the community require a special assessment in the future?”
Currently, many lenders and realtors now review the reserve disclosure in the real estate transaction process, and more importantly FHA guidelines now require review of reserve funding levels when communities apply for FHA certification. We hear that the“ whisper number” for percent funding is 60 % and this percentage may become official as lending requirements become more stringent. In other words, the percent funding number is becoming similar to a FICO score for the HOA’ s financial condition.
Not only is the reserve study important because it’ s the law and it helps protect your property value, but it also helps board members make good budget decisions. For volunteer homeowners who select to serve on the board of directors they have a fiduciary responsibility to make decisions in the best interest of the community and rely on experts to mitigate their liability. This sometimes results in making tough decisions especially when this involves raising assessments to cover current or future replacements or repairs.
An accurate and complete reserve study is the greatest tool a Board of Directors can have in regard to preparing an association for future major expense requirements as well as maintaining property values.
“ The law requires a reserve study, including a visual inspection, every 3 years and financial updates annually”
What qualifications should you look for when hiring a Reserve Preparer?
Some of the designations a potential client should look for include, but are not limited to: Reserve Specialist( RS) from Community Associations Institute( CAI;) the Professional Reserve Analyst( PRA) from the Association of Professional Reserve Analysts( APRA), general contracting license, architectural and engineering degrees, building inspector experience and other construction related fields.
The CAI Reserve Standards establish both requirements for the various levels of investigation necessary to prepare Reserve Studies and minimum content of Reserve Reports.
What are the different levels of service available?
Three Levels of Service that define the various types of Reserve Studies:
•“ Full” Reserve Study, which must include a Component Inventory, Condition Assessment( based on on-site visual observations), Life and Valuation Estimates, Fund Status, and a Funding Plan.
•“ Update, With-Site-Visit / On- Site Review” consisting of a Component Inventory( verification only, not quantification), Condition Assessment( based on on-site visual observations), Life and Valuation Estimates, Fund Status, and a Funding Plan.
•“ Update, No-Site Visit / Off-Site Review” limited to Life and Valuation Estimates, Funding Status and a Funding Plan.
The minimum content of a Reserve Report includes:
• A summary of the association’ s number of units, physical description, and Reserve Fund financial condition.
• A projection of Reserve Starting Balance, recommended Reserve contributions, projected Reserve expenses, and projected ending Reserve Fund Balance for a minimum of 20 years.
• A tabular listing of the Component Inventory, component quantity or identifying descriptions, Useful Life, Remaining Useful Life, and Current Replacement Cost.
• A description of the methods and objectives utilized in computing the Fund Status and development of the Funding Plan.
“ An accurate and complete reserve study is the greatest tool a Board of Directors can have in regard to preparing an association for future major expense requirements as well as maintaining property values.”
• Source( s) utilized to obtain component Repair and Replacement cost estimates.
• A description of the Level of Service by which the Reserve Study was prepared.
• Fiscal year for which the Reserve Study is prepared.
Damian Esparza Barrera and Company, Inc. 2207 Garnet Ave., Suite H San Diego, CA 92109( 858) 722-7512 Damian @ BarreraCo. com www. BarreraCo. com
14 | The HOA Board Quarterly | Issue # 2 | Spring 2012 Spring 2012 | Issue # 2 | The HOA Board Quarterly | 15